International soft law instruments as Governing Law: a (right) choice?
When it comes to cross-border transactions, parties can agree to have their contracts governed by rules of law specifically tailored by private institutions to meet the needs of international trade rather than national law. The most significant examples of such rules are the UNIDROIT Principles and the Principles of European Contract Law. Luiza Lins e Silva Dutra, LL.M. analyzes the pros and cons.
In today’s globalized market, international commercial contracts are commonplace. Every day, parties from different countries enter into countless new business arrangements, recording their agreement through the form of written instruments.
Most contracts contain choice-of-law clauses in favour of a specific national law. However, sometimes, international substantive rules offer more adequate solutions to cross-border transactions.
By way of example, the United Nations Convention on Contracts for the International Sale of Goods (CISG) provides for a uniform set of rules, that can be adopted by parties from any country to govern their sales contracts. The advantage of the CISG over a choice of domestic law lies on it being a neutral applicable law, to which both parties have equal access. Adopting the CISG avoids that one of the parties has a better position over the other when it comes to pleading the law in their favour. Only issues that are typically of lesser importance are governed by national law subsidiarily – to the extent the CISG is silent on them.
Other than the CISG, one may also point to the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles) and to the Principles of European Contract Law (PECL).
The UNIDROIT Principles were drafted with the objective of providing for a set of rules tailored to the specific needs of international commercial transactions. They are based on concepts taken from different legal systems, which are perceived as best practice for international transactions. The PECL, on the other hand, is a set of rules intended to reflect the core rules of contract law which are common to the EU Member States. They aim to create the basis for a future unified European Contract Law.
The UNIDROIT Principles and PECL differ from the CISG in two aspects. First, while the scope of the CISG is limited to contracts for the sale of goods, the UNIDROIT Principles and PECL are broader, covering not only sales, but also commercial agency, distribution agreements, licensing agreements, and any other B2B contract.
Second, while the CISG is an international convention to which countries have acceded, the UNIDROIT Principles and PECL are soft law instruments made available by private organizations. Consequently, the CISG becomes part of domestic laws and is applicable to commercial contracts unless the parties have expressly excluded it. On the other hand, the UNIDROIT Principles and PECL are principally only applicable where the parties have decided so (although courts and tribunals may take guidance from them even when deciding cases on which national laws may not have a clear-cut answer).
The Advantages of Choosing UNIDROIT Principles and PECL as governing law
The advantages of using international principles as governing law elected by a contract are the following:
- The UNIDROIT Principles were drafted by members of the international legal community to meet the specific needs and expectations of businesses when it comes to cross-border transactions. The UNIDROIT Principles were elaborated based on a best practices approach, reflecting what business men and women considered the optimal solution, rather than the most widespread one.
- UNIDROIT Principles and PECL provide for a neutral governing law. Both parties to a cross-border transaction can be equally familiar with the applicable rules. This eliminates the unfair advantage one party may have from knowing a domestic law better than its counterparty, and creates a better position for both parties to understand and negotiate the terms of their contract. In addition, choosing transnational or harmonized principles of commercial law will likely lower the costs a party might have to familiarize with a foreign law – which will be relevant at the stages of negotiation and performance of the contract, as well as at the eventual stage of dispute resolution. In regard to the UNIDROIT Principles, it is also worth mentioning that these are available in 8 different languages (including English, German, French and Spanish) and include an extensive and comprehensive commentary to each of its provisions, which facilitates legal research.
- The repeated use of international principles as governing law increases predictability of the outcome of disputes. UNIDROIT Principles and PECL are supposed to be interpreted and applied by judges and arbitrators in the same manner, no matter the forum nor jurisdiction in which a dispute is being resolved. International databases such as UNILEX and extensively available online resources provide a pool of decisions rendered by national courts and arbitral tribunals in matters where soft law instruments were chosen as governing law. Decisions and awards referring to the UNIDROIT Principles and PECL are often translated into English for academic purposes, which also increases global access to the reasoning adopted by decision makers when interpreting these instruments. The result is that the continuous application of these principles, with recurring reference to foreign jurisprudence or international precedents, contributes to harmonizing how they are interpreted and enforced.
Current challenges to electing soft law instruments as governing law
Notwithstanding the abovementioned advantages parties’ rights to choose soft law instruments as the law applicable to their contract also faces some obstacles.
In litigation, courts are bound by rules of private international law in order to assess the law applicable to solving a dispute (“conflict rules”). Many national courts decided that the parties may not, in state court litigation, opt for a non-state soft law instrument to choose a national law (see, e.g., Swiss Federal Supreme Court in the decision 4C.1/2005).
The wording of EU Regulation 593/2008 (Rome I) also leads many scholars to adopt a similar conclusion, although the issue remains unresolved as far as case law is concerned.
Notwithstanding these limitations (or uncertainties), it is clear that even in state court litigation, parties may use non-state set of rules to substitute non-mandatory provisions of the otherwise applicable national law.
The parties’ freedom of choice goes further in arbitration, though, where it is widely recognised that parties may elect a non-state set of rules to govern their contract, even to the exclusion of any national law.
Article 28 of the UNCITRAL Model Law on International Commercial Arbitration intentionally uses the wording “rules of law as are chosen by the parties” to designate the rules governing a contract. In the Explanatory Note by the UNCITRAL Secretariat, it is stated in para. 39 that the Model Law aims to broaden the range of options available to the parties, by allowing them to choose from rules that have been elaborated by international organizations or that have not yet been incorporated into any legal system.
The wording “rules of law” also appears in several arbitration rules issued by arbitral institutions, such as the 2017 ICC Arbitration Rules (Article 21.1), the 2014 LCIA Arbitration Rules (Article 16.4), and the 2018 DIS Arbitration Rules (Art. 24.1).
Parties may choose rules made available by non-State bodies, such as the UNIDROIT Principles and PECL, to regulate their commercial relationships. These rules are often more advantageous for cross-border trade. They take into account the specific needs of the international business community, providing for a neutral governing law, decreasing transaction costs, and increasing predictability of the outcome of disputes.
Choosing UNIDROIT Principles or PECL as contractual governing laws currently still faces one major challenge: none of these sets stands a strong chance of trumping state law before national courts. Parties may, however, overcome this issue by electing arbitration as the default method for resolving their disputes.